Winter Is Finally Coming: Market Commentary

15 November 2022 Time to read:  minutes


Stronger demand than recent years and well-documented supply shocks in NWE have left European gasoline inventories lower than average in recent weeks and arriving into the typical re-stocking period over winter below usual levels.

This has helped to push spreads higher as supply remained tight, but now that French system is broadly back online and with arbs still shut out of ARA, the backwardation in this market is set to ease as the fundamental picture stabilises.  

Prompt EBOB cracks have slipped in recent days (Sparta Platform) 

The situation we have observed since mid-September, with component pricing remaining too expensive for blenders to provide E5 into the market is showing little sign of reversing.

With blenders unable to generate volume the market selling directly to wholesalers remains scarce, forcing those actors back into buying in the window – in turn pushing finished EBOB grades higher.  

Indeed, we have consistently witnessed pricing windows shooting higher as they move closer to prompt price setting. Given that the prompt washes out the purely-paper players, leaving those with physical exposure to determine prompt pricing levels, this reflects to the previous point.

Physical players are left seeing component prices which remain too high and forced to buy in the window which remains short on offers given blending economics.

Ultimately this has been a situation which has arisen and been maintained by a lack of overall supply in the regional market. With the majority of supply disruptions now behind us and inventories set to build, that pressure on the prompt should begin to ease and component prices look set to move back towards workable territory.  

Blend margins in ARA have continued to come under pressure, but should reverse soon (Sparta Platform) 


Looking across the pond, it would appear that recent months have seen USAC players buying refiners’ Euro grades from Europe, rather than RBOB, and blending locally to take advantage of abundant domestic naphtha supply.

However, given that we naphtha cracks are expected to stabilise in the US in the weeks ahead, we may see Euro grades coming off and leaving more availability for the market in ARA.

Well supported Euro grades have been supporting reformate demand across many optimum blends in recent weeks, and we are likely to see these blends returning closer to historical average levels going forward given that the recent call on reformate is also likely to push reformate premiums beyond the reach of a number of blends.  

The share of reformate in blends has been higher than usual, with Euro grades expensive (Sparta Platform)


Finally, as we have been calling in recent weeks, the WAF market continues to be dominated by East of Suez supply, with reports of vessels from as far afield as China making their way into the WAF market.

With the European market settling down into a winter restocking period, however, we are likely to see increasing competition once more emerging from ARA for the resupply market into WAF.

With Houston still offering the cheapest source of supply across the western Atlantic, European players will need to start looking further afield again before long.  

ARA is already beating Singapore into WAF in Jan-23, with Ecuador and Mexico also looking possible  (Sparta Platform)

Although it is always a question of timing in this business, we can already see looking forward that January delivery is beginning to offer outlets for European barrels once more.

As such, we are sticking to our convictions that we are likely to see another turnaround in pricing flows coming up, but need to remind ourselves of the physical realities of reorganising trade flows and caution that it may be closer to the New Year before ARA is seriously looking to once again place barrels further afield.  

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Philip Jones-Lux is Commodity Owner for Sparta. Having worked with organisations  such as JBC Energy and RP Global, Philip is a seasoned energy market analyst with expertise across the oil barrel and power markets

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